Taxes constitute a significant source of earnings for the government of India. Whether you are earning a salary or watching a movie in a theatre, you may have to pay taxes to aceess various products and services. These taxes are either paid to the state or central government depending on the tax levied on the individual. Broadly, the Indian taxation system is divided into two subcategories: direct tax and indirect tax.
As a rational citizen of India, every individual must have a firm understanding of the type of taxes that the government levies. Both types of taxes are subdivided into several types, which we will discuss in this article. Read on to learn the difference between direct and indirect tax in complete detail.
Direct Tax vs Indirect Tax
| Basis | Direct Taxes | Indirect Taxes |
|---|---|---|
| Meaning | A direct tax is a tax levied directly on a taxpayer and is paid straight to the imposing authority. | An indirect tax is levied on goods and services and is paid by an individual to the intermediaries who then submit the tax to the government. |
| Governing authority | Central Board of Direct Taxes (CBDT) | Central Board of Indirect Taxes and Customs (CBIC) |
| Shift of burden | The burden of direct taxes cannot be shifted to another person. | The burden of indirect taxes can be shifted to others. |
| Taxpayer | Individuals, companies and HUFs (Hindu Undivided Family) | Final consumer |
| Taxable condition | Direct taxes are levied when the income of the individual is more or equivalent to the maximum limit. | Indirect taxes are levied when the consumer sells and purchases goods and services. |
| Tax evasion | An event of tax evasion is possible. | Tax evasion is not possible as the tax amount is included in the value of goods and services. |
| Tax collection | Tax collection is complex and difficult. | Tax collection is easy and convenient. |
| Impact of tax | The impact of tax falls on the same person. | The impact of tax falls on different people. |
| Final liability | Any person on whom the tax is levied is liable to pay the tax. | Only the person who is receiving the benefits is liable to pay the tax. |
| Nature of tax | Direct taxes are progressive in nature. | Indirect taxes are regressive in nature. |
What is Direct Tax?
A direct tax is a type of tax liability where the taxpayer has to pay the taxes directly to the imposing authorities. An individual paying direct taxes cannot transfer his/her tax liability to another entity or individual. These direct taxes are collected and administered by CBDT (Central Board of Direct Taxes). The Department of Revenue manages CBDT and governs the implementation of several types of direct taxes.
Types of Direct Taxes
In India, direct taxes are classified into three types: income tax, capital gains tax, and securities transaction tax (STT). A detailed explanation of all these major types of taxes is given below:
- Income tax
It is the most common direct tax levied by the government of India on an individual’s income. It is directly paid to the government on the basis of the different income slabs suggested by the IT (Income Tax) department of India.
- Capital gains tax
It is the tax levied on any individual making capital gains in the country. Such gains may arise from investments in land, equities, and more. These taxes are generally charged based on the time period for which such investments are being held.
- Securities transaction tax
If any individual is involved in security trading in India, then he/she is liable to pay the securities transaction tax. Such taxes are to be paid regardless of the gains made out of them.
What is Indirect Tax?
Indirect taxes are levied by the government of India on goods and services. These taxes are first paid to the intermediaries before they are directly paid to the government. Thus, they are referred to as indirect taxes. CBIC (Central Board of Indirect Taxes and Customs) administers and collects indirect taxes in India. Like CBDT, CBIC is also governed by the Department of Revenue.
Types of Indirect Taxes
Indirect taxes are a significant source of revenue for the government in India. Majorly, there are two types of indirect taxes as discussed in detail below:
- GST (Goods and Services Tax)
GST is the most common indirect tax that has replaced a series of indirect taxes like value-added tax (VAT), service tax, purchase tax and excise duty. GST serves as a comprehensive indirect tax that is levied on goods and services based on various tax slabs as suggested by the GST Council of India.
- Customs duty
It includes the charges paid by any individual who purchases goods and services from abroad. You have to pay customs duty regardless of the mode of receipt of the order (land, air, or sea). Therefore, this tax is levied on every good coming to India from foreign countries.
Also Read: Advance Tax: Definition, How to Calculate & More
The Benefits of Direct Tax and Indirect Tax
Benefits of Direct Taxes
- Establishes economic and social balance by implementing progressive tax slabs.
- Helps in reducing the rate of inflation by increasing tax rates during inflationary periods.
Benefits of Indirect Taxes
- Ensures equal contribution as every individual pays some amount of indirect tax on goods and services.
- Indirect taxes are unavoidable as they are charged on consumed goods and services.
Drawbacks of Direct Tax and Indirect Tax
Drawbacks of Direct Taxes
- Tax evasion and fraudulent practices undermine the effectiveness of direct tax collection.
- Direct taxes are often considered burdensome as they are paid in a lump sum annually, and the documentation process can be extensive and time-consuming.
Drawbacks of Indirect Taxes
- Indirect taxes are the same for all economic classes, which can be perceived as unfair for individuals with lower incomes.
- Indirect taxes increase the cost of goods and services, making them more expensive for consumers.
We learned about the two main taxes that add to the major revenue of the Indian government: direct tax and indirect tax. By learning about these taxes, you may know why the government charges them and how you are contributing to the country’s development. A direct tax is a tax levied by the central government on the income and capital gains of a taxpayer. On the other hand, indirect taxes are the tax levied on goods and services and are paid to indirect intermediaries. As a rational citizen of India, everyone must have a firm knowledge of the taxes they are paying and clarity of the differences between them.
What are the benefits of Direct and Indirect Taxes?
What are the disadvantages of Direct and Indirect Taxes?
Does Goods and Service Tax (GST) fall under direct or indirect tax category?
How would I know which tax is direct or indirect?
Is the rate of payment different for direct and indirect taxes?
